Trieste: Silk Road return or how China called Italy’s bluff?

There has been much commentary around the intent and development of China’s push to increase it trade and energy security with Europe. Taking the view that the Xi Jinping announcement that China was giving rebirth to the original Silk Road through the announcement of the Belt Road Initiative (BRI), one can understand why developments in Europe and the Mediterranean have attracted interest of late. This interest underscores how the differences in understanding the intent of China, created alternative engagement strategies. The different approaches are reflected in how Greece and Italy approached China, and how it can be argued that the Italian government was outsmarted by the Chinese, particularly around the ports of Piraeus and Trieste.

In order to understand this, we need to have brief reminder of the history of the Silk Road. The original trade routes connected west to East over centuries. The Mediterranean played a central role, connecting cargos, cultures and people. It provided the connection between land and sea trade, as well as providing the pathway for trade between Europe and markets in North Africa. It also reflects the maritime and trade competition between Italy and Greece has been around for centuries, with their respective strategic importance being further enhanced following the construction of the Suez Canal. In essence this is being repeated under the auspices of the BRI with the infrastructure program pairing ports with rail (inland routes) networks to connect markets as well as provide China with a western outlet to secure trade and energy. Ports and shipping organisations are only now recognising how these port-rail pairings are revolutionising trade.

How China called Italy’s bluff?

In the initial phases of the BRI, Italy took the view of many in the West, arguing China was merely trying to establish itself as the new world hegemon by gaining control of strategic locations through debt diplomacy and commonly referred to debt trap. It also argued that the BRI presented security risks and would lead to increased militarisation of the region.

Greece, in the form of Piraeus saw the BRI differently and saw the BRI as a means to lift their economy by engaging with China. Leading the pack was the Chinese mammoth Cosco Shipping Holdings, operating 150 sea-rail container transportation corridors through 100 ports. After taking a 51% stake in the Greek port of Piraeus it turned this sleepy port into a key transhipment terminal connecting maritime shipments from Asia to rail and roads that snake into more European markets. It delivered the new Silk Road model that connected ports to hinterland markets with rail serving as last and first mile transportation. The results of this engagement saw Piraeus take advantage of the growing container trade of China, which constitutes 32% of the global container fleet. Whilst seaborne trade between Europe and Asia slowed in 2018, Piraeus witnessed growth as China’s maritime gateway to southern Europe, growing from 3.75m teu in 2017 to an anticipated 4m teu in 2018.

With China applying its stated free-choice approach to participation in the BRI, Western Europe is waking up to the ground breaking modus operandi. Italy has been careful to stress that they are engaging China on a whole ‘Italian Port’ basis, arguing that Italian ports offer more than Piraeus in terms of a logistics platform for central and southern Europe, but also into North Africa. Furthermore, Italy has stressed that they will not sell-off assets despite their infrastructure being in a state of crisis. They have encouraged partnership and investment in infrastructure that offers a simpler access to the sea.

However, Beijing has declared its interest in the north-eastern port of Trieste rather than the touted Genoa port. Trieste suits China’s plans as it is already connected by rail to Austria, Belgium, the Czech Republic, Germany, Hungary, Luxemburg and Slovakia. Italy has also been at pains to point out that China made a “mistake” with Greece as it is not within easy reach of European markets by rail. Over and above these claims, Trieste has strategic location advantages for trade between the Suez, Mediterranean, Central-Eastern Europe and the new Arctic Route. These advantages include its 18-20 m water depths, legal status as an international free port as well as being the most northern part of the Adriatic Sea.

Trieste is now openly marketing its location and position to China, particularly their international free port status that allows public concessions over the main free port areas. They are now trying to make up lost ground by positioning themselves to leverage this new transportation mode by adding more features to their service. The free port status makes it possible for value added services such as loading, discharging, storing and manufacturing without having to pay taxes and freedom of transit of goods to other European States. The focus is not so much the number of containers moved but the value added in relation to those containers. For example, Trieste is in the process of seeking $1.3bn so that road / rail access to containers is more efficient. This would be made possible by a large quayside, a railway terminal, container deposit areas and a free zone that can be used for warehousing and goods assembly. China is looking to cover half the cost with the balance coming through countries such as Kazakhstan, Azerbaijan, Turkey, Iran and Malaysia. It is interesting that Italy is the first G7 country to sign an MOU within the BRI framework.

By engaging with China, Trieste has doubled its container traffic since 2016 as it works to take capture some of the 70% of trade that passes between Europe and China via sea routes. There were 486,000 teu moved in 2016 but saw a dramatic jump to 730,000 teu in 2018. The number of operated trains has also doubled from 5000 to 10,000 over the same period. Whilst these are relatively small when considering that Piraeus had 4m containers in 2018, it is a step in the right direction.

Clouds on the horizon?

With the current level of Chinese investment into Italian Companies it is feared that China will obtain almost complete control of the international free port of Trieste. This would give China a significant bridgehead for both economic and strategic penetration into Europe. The EU has raised these security concerns with Italy and has proposed a screening mechanism for security-sensitive industrial sectors. Included in the EU / Italy dialogue is to restrict Chinese ownership to minority shareholdings as well as retaining security control over key assets. It is enforcing the 1954 agreement that gives NATO responsibility for security of the port.

There is also the issue of who actually owns Trieste port. Current agreements are legitimate under Italian Law in any Italian port, however the international free port of Trieste does not belong to Italy or to the EU. It is entrusted to the temporary civil administration of the Italian government by the US and the UK as primary administration governments on behalf of the UN Security Council. This was established under UN Security Council Resolution S/RES/16 (1947) as part of the Treaty of Peace. In other words, the Trieste port opens its doors to all countries and forbids the establishment of the part area’s under the exclusive control of any one country or state.

Conclusion

There is a significant amount of smoke and mirrors with the port of Trieste, but what is clear is that Italy are wanting to participate as a component of the BRI. This realisation has been brought about by China’s engagement with Piraeus in Greece. Whilst there are issues being raised, China can point to the transparent and inclusive nature of the BRI, particularly as they do not seek majority ownership of key assets and accept the security and safety of this key port is enshrined in UN convention as being the responsibility of NATO.

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.

6 Comments

Charles de Trenck

January 24, 2019 at 1:52 am

Enjoyable and informative piece. Thanks.
1) for reference, I would refer BRI interested parties to seek out a useful list of projects put out by Clarksons.
2) I would not agree that waking up to China’s ‘debt and cost overruns/wastage tradable into increased political and strategic leverage’ strategy was a first phase understanding. For the media and average onlookers I would ascribe it to a 2018, perhaps 2017 awakening.
3) Some projects will prove innovative and powerful trade stimulants. Many are clearly political. A recent WSJ piece on documents behind China and 1MDB support for the ex Malay PM were quite revealing on modus operandi.
4) Of course, we should place this in context of previous hegemonic behavior by other superpowers. …
Thanks and best

We consider it necessary correcting the false and harmful information provided on January 24th with comment signed “Triest ngo”.

It is untrue that Trieste «is currently administered by Italy completely against the International laws in force» and that «international actions would most definitely be needed».

As recalled by Andre Wheeler, Trieste is sub-entrusted to the temporary civil administration of the Italian Government (not of Italy as a State) under mandate of the Governments of the United States of America and of the United Kingdom of Great Britain and Northern Ireland, for their role of primary administering Governments on behalf of the United Nations Security Council.

This legal status of Trieste does not violate, rather, it correctly complies with and enforces the Treaty of Peace with Italy of 10 February 1947, and of the Memorandum of Understanding regarding the Free Territory of Trieste of 5 October 1954, both in force (see: U.S. Department of State – Treaties in force on 1st January 2018).

The Italian Government commits serious violations of its sub-mandate of temporary civil administration, thus affecting also the international Free Port of Trieste and the rights of all States over it. However, international legal actions are not yet necessary to put an end to said violations for the benefit of all parties concerned, because such actions could make the situation more difficult and delay its settlement.

This is why the International Provisional Representative of the Free Territory of Trieste – I.P.R. F.T.T. has laid the groundwork for a simpler settlement of the dispute by summoning the Italian Government before the Court of Trieste, seeking the enforcement of the law.

In facts, this kind of legal action allows discussing and settling the dispute quickly and peacefully also through direct negotiations, and does not require the official involvement of the International community.

Hapsburg

Fact. The administration is temporary.
Temporary means that the administration is under the jurisdiction of the UN.

Fact: Italy will never give up what “they believe” is their sovereignty, the same applies to Slovenia and Croatia.

Fact: Only international action is necessary, dialog with Italy, Slovenia and Croatia re meaningless since it would only go against their belief. Negotiation will end up in a less than equitable compromise for the People of the Territory.

Fiona

January 25, 2019 at 4:02 am

È amministrata dal Governo Italiano non dall Italia

erik ferluga

January 27, 2019 at 11:54 pm

About last informations we specify that everyone has his truth. They only fight on two different fronts.

THE WORLD MUST KNOW: the issue of the Free Territory of Trieste as an International Nation and its socio-economic potentiality.

In the era of globalization, right or wrong as it may be, there are some realities in contrast to the increasing world crisis, which is spreading from the most developed countries, that can change current economic and commercial assets in favor of many regions and nations of Central Europe and of the world.
One of such realities is situated in the heart of Europe, that is the northernmost point of the Mediterranean Sea. We are talking about the great economic, commercial and industrial potentials of the Free Port of Trieste (F.P.T.), which is part of the Free Territory of Trieste (F.T.T.), both founded by the UN as independent states with their own statutes, but connected by socio-economic functions.
Since many years in Trieste we have the Miramare International Centre for Theoretical Physics, the synchrotron light source Elettra, the AREA Science Park, the Biotechnical Laboratory earmarked by UNIDO, the SISSA International School for Advanced Studies, the Wärtsilä Italia S.p.A., the Experimental Geophysics Observatory, the International University of Students, the United World College of the Adriatic, and other companies known.
Historically in 1719 the emperor Charles the VI established a free port in Trieste, granting the city complete market autonomy, ensuring stability without requiring taxes. Those privileges endured during the reign of Empress Maria Theresa and were reconfirmed and improved in 1891 by Emperor Franz Joseph.
The United Nations Security Council Resolution 16° adopted on January 10th 1947 legally established and approved the Free Territory of Trieste and the extraterritorial Free Port of Trieste. The three attachments statutes denominated ANNEX VI, VII and VIII were later included in the Treaty of Peace with Italy signed on February 10th 1947 that marks the borders of this extraordinary International Nation. This nation was set up after the end of Second World War as the main concern and wish of the winning party was to guarantee a peaceful coexistence between people and the free international transit of goods through the port of Trieste, and not the nationalistic issues, that were overcome with the establishment of the Free Territory of Trieste, as an International Nation that BELONG TO EVERYONE. This International Nation, administered by Allied Military Government under the United Nations protection, lasted until 1954. The treaty and the Attachements were drawn up clearly and detaily, are particular in the way they show the administrative, legislative and legal way to rebuild and reform this new nation, which is a demilitarized tax free zone under the role and protection of the United Nations !
Unfortunately the former Allied forces started to divide Europe in two ideological blocs with different political views, that is the communist and capitalist ideology already in 1948. Following the Memorandum of Understanding of October 5th 1954 the territories under military administration of the Protection Allied Forces for the Free Territory of Trieste were temporarily (see article 1) entrusted to Italian and Yugoslavian civil administration (see article 2), the last one was succeeded by Slovenia and Croatia in 1991. In 1975 Italy and Yugoslavia signed an almost secret bilateral treaty to annex the temporarily administered zones of the F.T.T. Since then nobody wanted to raise the issue of the Free Territory of Trieste, divided into 3 zones, that were still temporarily civil administered by Italy, Slovenia and Croatia respectively, and still subordinated to the before mentioned International Treaty of 1947; therefore the territory is just apparently subordinated to Italian, Slovenian and Croatian territorial and political sovereignty.

Unfortunately the “cold war” and nationalistic tensions were the reason for failure of political and administrative realization of the Free Territory of Trieste and the reason for constant decline of local economy in the territories administered by Slovenia, Croatia and Italy. Since 1989 the ideological contrasts have been overcome, therefore there are no more political, strategic and military interests that for decades had blocked the territory’s economic development. The port (with 18 meters deep sea bottoms!) is lacking infrastructure and does not guarantee equal access to Trieste’s commercial transit way for the international and Central European commerce, as is common in other ports of the world. Within the port EVERYONE can legally establish new industrial, shipyard, commercial and storage activities with the opportunity to enlarge the facilities both on land and sea. Not to underestimate that a completely renewed international free port, both for the administrative, logistical part and the modern infrastructure for loading and unloading goods, would be in line with the most important ports of the world, contributing to the economic development of all countries. The Free Port of Trieste included in the Free Territory of Trieste would be a unique and new example of peaceful coexistence and economic, social and cultural growth, as well as a meeting point for many nations.
The Free Territory of Trieste today has approximately 315,000 inhabitants; its territory 738 km2 wide, spreads from the mouth of the Timavo river near Duino-Devin (zone A) and the river Mirna near Novigrad (zone B), including the Port of Koper (Slovenia). The most widely spoken languages are Italian, Slovenian and Croatian; the citizens are multiethnic and multicultural, mixed between Slovenian, Italian, Croatian, Austrian, Hungarian, Slovak, Czech, Greeks, Jews, Russian, Chinese etc. The inhabitants are “cosmopolitan”, as citizens of the only International Nation.
In crisis time nobody can allow itself unproductive public assistance, therefore Trieste fights to get back its legitimate welfare, economic and commercial Mittel-European role, inherited by the Austro-Hungarian Empire, that the United Nations well understood at the end of the Second World War. That would establish a sea traffic flow between Africa, Asia, America and Europe essential for the international and Central European economy. Starting a constructive discussion at a diplomatic level, presenting the issue of the Free Territory of Trieste to The United Nations (as the U.N. already replied by letter ref. PO210P1 of May 20th 1983), would lead to an international political unblocking for the benefit of everyone.

The Free Port of Trieste cannot be administered by Italy no more, therefore the Free Port of Trieste and the Free Territory of Trieste must be given back to the international community.

The International Commission for the Free Port, the United Nations Security Council and the respective foreign ministers of the United Nations Member States, has been for a long time resorting to tools of the International Treaty to legally reestablish the already established and recognized Free Port of Trieste that also includes the Port of Koper, whose integrity, independence, protection and demilitarization are ensured by the United Nations Security Council. It has already formally reported the international community (U.N.-United Nations) everything that has to this date blocked the social and economic development of this International Nation, unique in the world, that unfortunately the local politics wants to destroy, depriving the city, the nearby countries, Europe and the whole world of a great opportunity.

The Free Territory and the Free Port of Trieste was wanted by UN as an example of cohabitation among people of all Nations and Trieste’s people have been chosen as manager of this International Nation unique in the world.

So we’re asking to every permanent members of the UN Security Council, and to the others UN member countries involved on “One Belt One Road Project”, could intercede on the Free Territory and Free Port of Trieste issue, proposing and recommending the discussion to the UN, as required by the United Nations on the 20th of May in 1983 finally to open the Free Port of Trieste to whole world.